A time capsule of the greatest financial mania in the history of mankind, told in real-time by regular folks and patriots. May future generations better understand the madness of crowds, and how power and money corrupt.

September 30, 2007

When the banks start failing left and right, and the US Taxpayer has to pay out wayyyy beyond their FDIC insurance levels, HP'ers shouldn't be surprised. It hath been foretold.

From last week's hearings on Moody's and S&P's incompetence in letting the toxic loan CDO/SIV problem grow out of control:

At a Congressional hearing yesterday on the malfeasance of ratings agencies, like Standard and Poor's, in hyping the mortgage securities bubble, Rep. Paul Kanjorski (D-PA) repeatedly noted that the mortgage securities blowout is now a "systemic financial crisis." It threatens American banks with failure like that of Britain's Northern Rock and other European banks, Kanjorsky implied in a colloquy with witness Prof. Joseph Mason of Drexel University.

"You say that 10% of U.S. bank assets are based on structured investment vehicles (SIVs), specifically several trillion dollars in CDOs; can these banks survive the collapse of these CDOs? Do they have the capital base to survive that?"

Mason answered, "No, and the FDIC does not have the resources to handle that event either."

Banks have been dinging people with fees and such for years. Plus they make money on the spread between the low interest rates they pay depositors and the higher rates they charge on mortgages.

I got a question: anyone know what the process is for getting your money back if an FDIC insured bank fails? How long does it take, how complex is it? The failure of NetBank has me nervous - I got a lot of CDs in different banks, other than staying under the limit and avoiding obvious losers like CountryWide and IndyMac, I don't know what else to do.

I am a commercial lender for a $1.5 billion (asset size) community bank. I think it is important to note that people use the word "bank" to mean a lot of things. Most often it seems to be used as a general term, including many types of financial organizations. Commercial banks make their loans with depositor funds (as opposed to "recycling" investor money) and have certainly been involved in mortgage lending but they typically sell those mortgages immediately after closing, passing the interest rate risk and the credit risk on to the buyer. Lenders such as Countrywide, Wells, etc., however, do make a living PRIMARILY by making home mortgages and therefore do carry far more of the risk directly. It is important not to overgeneralize in using the term "bank" just as one would not intend the word "car" to include buses, trains, and horses. I would suggest that the basic commercial banking system, overseen by the OCC and state regulators, and regulated by the Fed, should not be included in the same risk category as mortgage companies, brokers, Fannie Mae, etc. and I would also welcome Keith's comments on this.

I got a question: anyone know what the process is for getting your money back if an FDIC insured bank fails? How long does it take, how complex is it? The failure of NetBank has me nervous - I got a lot of CDs in different banks, other than staying under the limit and avoiding obvious losers like CountryWide and IndyMac, I don't know what else to do.

The FDIC will work at the beginning. But if there is a tsunami of failures---and the strongest banks will be at the END, not the beginning of this---they will be overwhelmed. You won't see anything for ages. There will be enormous paperwork backlogs and lawsuits and whatever.

So actually if you are in a better bank you may be worse off if it finally fails late.

What to do is actually pretty simple. Get out of the worldwide banking system. No I don't mean get gold bars or any such.

Get an account at Fidelity, and buy US treasuries and agency bonds at auction with half your money. No charge for T-bills. And no state income tax on certain US government instruments.

Then invest the other half in MERKX, a fund which is in foreign government "hard currency" bonds.

You are much more likely to survive here.

Remember that your deposit at a bank is an 'obligation' to them, i.e. something they owe. The killer is always leverage and banks are quite leveraged. They'll fail before the US or German or Australian treasury defaults. This bank problem will be worldwide.

The parent of NetBank, a pioneer in Internet banking, filed for bankruptcy protection after the savings-and-loan became the first in three years to fail.

NetBank is the largest bank failure in Georgia history, is the second FDIC-insured bank to fail this year and is the first in the state since AmTrade International Bank of Atlanta closed in September 2002.

Alpharetta, Ga. based NetBank -- an Internet bank with no physical branches -- had $2.5 billion in total assets and $2.3 billion in total deposits as of June 30.

According to the Office of Thrift Supervision, NetBank's significant losses began in 2006 with early payment defaults on loans sold, weak underwriting, poor documentation, lack of proper controls and failed business strategies.

Founded in the mid-1990's. NetBank was one of Atlanta's first Internet companies, and remained as one of its oldest.

Banks won't go under. It's the non Federal Reserve member banks that are screwed. The member banks can't wait to squeeze those non member banks so they fail and take their deposits. Any bank that does not say NA or National in it's name is not a federal reserve member bank. I expect that they are on the member banks hit list to squeeze them out of business like what happened in the 1990's.

Well, maybe the FDIC will be able to make up the shortfall with tax revenue. It's comforting to know that the money we have on deposit if fully insured by the full faith and trust of the US government.

OH SH!T !!!

Here's a sad story of a bank that just failed because it had too many of those darn mortgage defaults:

"NetBank Inc., an online bank with $2.5 billion in assets, was shut down by the government on Friday because of an excessive level of mortgage defaults."

"It was the largest savings and loan failure since the tail end of the industry's crisis more than 14 years ago. Federal regulators appointed the Federal Deposit Insurance Corp. as a receiver for Alpharetta, Ga.-based NetBank."

But, not to worry:

"Customers of NetBank should have confidence and security knowing that they will have access to their insured funds in a timely and orderly manner," FDIC Chairman Sheila Bair said in a prepared statement.

"The FDIC insures bank deposits of up to $100,000."

Only $2.5 billion in losses? The FDIC should have that much in petty cash. This story has a happy ending, after all.

So that's it then. Our stupid politicians are going to have to wrap their pea-brains around this:

We DO NOT have the $$$ to "rescue" these poor dimwit homedebtors/mortgage brokers with bailout money.

We're gonna need every cent we've got to cover FDIC bank accounts up to 100K. If they don't keep that promise, no one will ever put their money in a bank again.

And fire proof, portable cash boxes will be the business to be in.

Oh and BTW you stupid Senators and Congresspeople who watched this whole thing go down and encouraged it by a$$ ki$$ing the NAR and Brokers, once the banks collapse and you've got to make good on FDIC, the customers get their cash and the bank gets CLOSED DOWN and the senior officers of closed banks don't get to go stay in the banking business. UGH